Last updated on February 4th, 2024 at 03:36 pm
What is a housing crash
A housing market crash is a situation where the prices of homes decline significantly, leading to a decline in the overall economy.
This can happen for a variety of reasons and can have a significant impact on the economy, as well as on individuals who own homes or are looking to purchase one.
What is a housing bubble
In a housing bubble, real estate prices rapidly increase to unsustainable levels, eventually leading to a market correction and a decrease in prices.
A crash is good for future home buyers as prices are reset. However, current homeowner or those buyers who recently purchased before the crash, will feel the pain.
What can cause a housing market crash
It’s usually the same reasons that causes a housing market crash. They may seem different each time, but the are really the same.
[Economic downturns]: A recession leads to job losses. Sellers cannot afford to make the payments on their homes and they have to sell!
[Interest rates]: If interest rates rise significantly [which they have in 2022 and 2023], it can make it more expensive for people to borrow money to purchase a home, leading to a decrease in demand and a decline in housing prices. Higher interest rates generally lead to higher mortgage rates. When rates go up, buyers of homes tend to drop out of the market as it makes homes more expensive to purchase.
According to a survey of lenders conducted by mortgage giant Freddie Mac, the average rate on a 30-year fixed mortgage was 6.09% as of February 2, 2023, down from 6.13% the previous week. The 15-year fixed-rate mortgage hovered around 5.14% this week, down from 5.17% the previous week.
[Overbuilding]: If there is a significant amount of new construction including speculation by builders, and there are more homes available than there are people to purchase them, the market can become saturated and lead to a decline in prices. Currently there is a limited supply of homes on the market, [2022-2023]so overbuilding doesn’t seem to be an issue.
[Unemployment]: If there is a significant increase in unemployment, it can reduce the demand for homes and lead to a decline in housing prices. Right now the unemployment rate is extremely low [just 3.4%]in the USA. When unemployment increases, sellers will begin to list their homes on MLS, thus increasing the supply of real estate.
What are the signs of a housing crisis
The same signs can point to a housing market crash in the near future.
Declining home sales: The number of homes sold each month decreases. This points to a decline demand for homes.
Rising inventory: If there is an increase in the number of homes available for sale, it may indicate that there is an oversupply of homes and that prices may be headed for a decline. Inventory increased in 2022 but is still well below pre Covid levels. Realtors will tell you in many cities that there is no inventory.
Its hard to fathom some sort of housing crisis with a shortage of single-family homes on the market compared to the mean!
The current housing inventory currently sits at 625,875 homes and is far from turning into a buyer’s market.
Decreasing home prices: If home prices are declining, it may indicate that the housing market is headed for a crash. Currently home prices are declining, but they went up so much from 2020-2022 that it does make sense for some sort of decline.
Increasing foreclosures: An increase in the number of foreclosures points to something wrong in the marketplace. Sellers cannot make their mortgage payments and must list their house on the MLS.
Will there be more foreclosures in 2023
Foreclosures certainly can have an impact on housing prices in almost all housing markets.
Although foreclosures have increased since before the pandemic, they are well below historical figures. In fact the total number of foreclosures in 2022 was 324,237 according this Attom.
We probably can expect more foreclosures in 2024 than 2022.
If we look at the housing crash of 2008, foreclosures peaked at an astound 2.8 million!
Remember the market crash in 2008 was due partly because fo the mortgage subprime crisis.
Based on this foreclosure activity of 2022, economists and other experts would be hard pressed to predict another crash coming anytime soon.
Housing Inventory [Active Listings]
| December 22 | January 23 | February 23 | ||
| Houston | 20,162 | 18,699 | ||
| Austin | 7,127 | 6,350 | ||
| Phoenix | 14,922 | 13,618 | ||
| Miami | 26,188 | 26,198 | ||
| Seattle | 4,583 | 3,699 |
Have there been any housing market crashes in the past
Yes, there have been several housing market crashes in the past. Here are some examples from across the world. Almost everyone remembers the Great Recession that sparked a huge housing crisis .
The US housing market crash in 2008 [subprime mortgage crisis], which was a major contributor to the global financial crisis. Many lenders approved loans for buyers that simply didn’t have the income and couldn’t prove their income. Mortgages were just too easy to obtain for many buyers who weren’t qualified.
The Japanese housing market crash in the 1990s, where property prices fell for over a decade.
In the 1990’s, Japan experienced a large decline in its housing market, also known as the “Lost Decade.” The market crashed! This was due to a combination of various factors, including a declining economy, a burst of the real estate bubble, and a decrease in population growth.
With lowered demand for housing, property values turned lower as the number of homes on the market began to increase.
The Japanese government implemented measures [that didn’t work] to try to revive the housing market, but these efforts were largely unsuccessful and the market continued to struggle for many years.
The housing market crash in Spain from 2008 to 2013, which resulted in a significant decline in property values and a high rate of foreclosures.
During Spain’s housing market crash in 2008, housing prices dropped significantly. The exact amount of the decrease varied based upon the type of property [single-family home, condo, townhome], but on average, prices fell by around 40% [not many people in the USA can fathom this kind of drop] from their peak.
In some parts of Spain, the drop was even greater. This sharp decline in housing prices had far-reaching consequences for the Spanish economy and many homeowners, buyers, and investors that were heavily invested in the property market.
These are just a few examples, and housing market crashes have occurred in many other countries as well.
How much can we expect properties values to decline
Nobody knows for sure how much prices will go down in a housing market crash. All you can do is guess.
There are many pundits that get it wrong and make exaggerated statements. But each housing crisis is different, so we just don’t know what is going to happen in 2023, 2024, and so on.
However, in previous housing market crashes, prices have declined anywhere from 10% to 50%.
The cities that experienced the largest housing market price decreases during the Great Recession are the following Las Vegas, Nevada; Phoenix, Arizona; and Miami, Florida.
How much housing will go down in the next crash will depend on the specific circumstances of the crash, including the causes and the severity of the economic downturn.
What is the length of a housing crash
The length of a housing market crash [nobody can say for sure], will depend on the specific circumstances of the crash. Some housing market crashes have lasted for several years, while others will be shorter in length.
Look at Japan above, they had a slowdown for a decade!
While a housing market crash will occur in the future, it is important to be aware of the factors and signs that can contribute to a crash. There is not much people can do to prepare for one other than make sure they have enough funds in the bank.
It is also important to keep in mind that all housing crisis are different. Housing market crashes probably won’t ever be the same.
But we can look at the data from 2008 to determine how long that crash lasted and when the housing recovery began.
Remember each city in the nation will be different, in San Francisco, it took between 3 and 3 and 1/2 years for house prices to recover.
What can be done to prevent home values from crashing
There is no foolproof way to prevent a housing market crash, as they are often driven by complex and interconnected economic, social, and political factors.
However, there are a few steps that can help mitigate the risk of a housing market crash and minimize its impact:
Maintaining stability in the overall economy, such as through monetary policy and controlling inflation. This is what the Fed has been doing in 2022-2023.
Regulating and monitoring the real estate market and the lending practices of financial institutions.
Encouraging sustainable and responsible borrowing and lending practices.
Encouraging a diversified and balanced real estate market, rather than a market dominated by speculative investment.
Educating consumers about the risks of real estate investment and promoting financial literacy.
The best way to prevent a housing market crash is to ensure that the market operates efficiently.
Loans should only be given to buyers who can prove income and assets. Speculation should be kept to a minimum.
Millennials are the largest generation of first–time homebuyers in the housing market today. As such, Millennials are driving the current trends in the housing market.
As is such, there are many millennials in the U.S.A. today and with limited supply in the market, housing prices just seem prepared to continue an upward trend.
- Housing affordability is apparent today. The cost of homes continues to rise and inventory is low.
- Taking on too much debt in order to purchase a home can be a dangerous trap, as it can lead to financial difficulties in the future if their income does not keep pace with their mortgage payments.
Current housing forecast for 2023 and 2024
Millennials are the largest generation of first–time homebuyers in the housing market today. As such, Millennials are driving the current trends in the housing market.
As is such, there are many millennials in the U.S.A. today and with limited supply in the market, housing prices just seem prepared to continue an upward trend.
- Home prices are elevated making it unaffordable for buyers.
- We think the higher interest rates and tighter lending will prevent more borrowers from trying to qualify for a home, likely increasing the pool of renters. Rents will rise as a result, as will inflation figures.
- Some sellers may in fact want to turn into landlords and lease out their house to take advantage of the situation.
What are the authorities saying about housing in 2024 and beyond
A leading authority Goldman Sachs, recently came out with their predictions for markets across the country.
They stated housing prices would drop an additional 6.1% in 2023.
Take this with a grain of salt, if you look at an authority in the industry in previous years, they are seldom correct.
Housing experts back in 2021 said mortgage interest rates would remain low in 2023. My how wrong they were!
Many housing experts are saying prices will decline, but not at the amount needed to call it a market crisis!
If housing supply remains low, they will certainly put a lid on any pressure to sell.
With over 15 years of unwavering dedication to the Texas real estate market, Andrew Reichek is your trusted partner in achieving your real estate dreams. As a licensed Texas Real Estate Broker, Andrew’s unparalleled experience and expertise make him the go-to choice for both buyers and sellers. His extensive knowledge of the local real estate landscape and commitment to delivering exceptional service have made him a recognized authority in the industry.